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Contract Act 1872 - MBA Sem-I

The Indian Contract Act 1872 determines the circumstances in which a promise made by parties to a contract shall be legally binding. It covers general principles of contract law, sale of goods, and special contracts like indemnity, guarantee, and partnership. For an agreement to be considered a valid contract under the Act, it must have offer and acceptance, lawful consideration, capacity and free consent of parties, a lawful object, and certain terms that are capable of being performed. The Act governs essential elements like proposal and acceptance, consideration, capacity to contract, and consent, as well as situations where consideration may not be necessary.

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0% found this document useful (0 votes)
50 views37 pages

Contract Act 1872 - MBA Sem-I

The Indian Contract Act 1872 determines the circumstances in which a promise made by parties to a contract shall be legally binding. It covers general principles of contract law, sale of goods, and special contracts like indemnity, guarantee, and partnership. For an agreement to be considered a valid contract under the Act, it must have offer and acceptance, lawful consideration, capacity and free consent of parties, a lawful object, and certain terms that are capable of being performed. The Act governs essential elements like proposal and acceptance, consideration, capacity to contract, and consent, as well as situations where consideration may not be necessary.

Uploaded by

Imran Anwar
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Indian Contract Act 1872

Module-I

1
Purpose of Indian Contract Act

• The Act was passed by British India and is based on the


principles of English Common Law.
• It determines the circumstances in which a promise made by
the parties to a contract shall be legally binding on them.
• It is applicable to the All States of India except the State of
Jammu & Kashmir.
History of Indian Contract Act
• The Indian Contract Act came into force on 1 st September 1872.
• Before the enactment of the Indian Contract Act, 1872, there
was no codified law (specific law) for contracts in India.
• The Act originally had 266 Sections.
• The entire Act was divided into following parts:
– General Principles of Law of Contract (Sec 1 to 75)
– Contract relating to Sale of Goods (Sec 76 to 129)
– Special kinds of Contracts (indemnity, guarantee, bailment &
pledge) (Sec 125 to 238)
– Contracts relating to Partnership (Sec 239 to 266)
MEANING OF CONTRACT
According to Section 2(h)
- A contract is an agreement enforceable by law.

CONTRACT

Agreement Legal Enforceability


MEANING OF AGREEMENT
According to Section 2(e)
Every promise or a set of promises, forming the
consideration for each other, is an agreement.
AGREEMENT

Promise or set of
Valid Consideration
Promises
PROMISE Sec 2(b) A proposal when accepted becomes a promise.
CONSIDERATION Price paid by the one party for the promise of the other. Technical
word meaning ‘QUID PRO QUO’ i.e. something in return
MEANING OF PROMISE
• According to Section 2(b)
– when the person to whom the proposal is made
signifies his assent thereto, the proposal is said to
be accepted.
– A proposal, when accepted, becomes a promise.

PROMISE

Offer/Proposal Acceptance
MEANING OF CONTRACT
CONTRACT

Agreement Legal Enforceability

Promise or
Lawful
set of Promise - Where Rights and
Consideration
Obligations in a contract
are enforceable in the eyes
Offer Acceptance of the Court.

- Means where parties to


the contract have rights to
file a case in court.
• Rights and Obligation
»Contractual rights and obligations are correlative

• Agreements which are not contract


– Relating to social matter
– Domestic arrangement
» Balfour v. Balfour

Agreement Legal Obligation

Contract
“All the contracts are agreement but all agreements are not 8
contract.”
ESSENTIAL ELEMENTS OF A VALID
CONTRACT (Section 10)

• According to Section 10, all agreements are contracts


if they are made
– by the free consent of parties
• competent to contract,
– for a lawful consideration,
– with a lawful object, and
– if they are not expressly declared to be void.
ESSENTIAL ELEMENTS OF A VALID CONTRACT

The essential elements of a valid contract are:


• Offer and Acceptance: There shall be an offer or proposal by one party and
acceptance of that offer by another party resulting in an agreement
(consensus ad idem).
• Intention to create legal relations: There shall be an intention between the
parties to create legal relations.
• Lawful consideration: The agreement is supported by a lawful consideration.
Consideration means something in return.
• Capacity of parties: The parties to the contract shall be legally competent to
contract.
• Free consent: The consent of the parties shall be genuine and free.
• Legal object: The object of the contract shall be legal and shall not be
opposed to public policy.
• Certain terms: The terms of the contract shall be certain and shall not be
vague.
• Possible performance: The agreement is capable of being performed i.e., it
is not impossible of being performed.
Offer or Proposal and Acceptance

• Sec.2(a),
When one person signifies to another his willingness to
do or to abstain from doing anything to obtain the
assent of that either to such act or abstinence, he is said
to make a proposal.

11
Rules governing offer
1. Offer must be capable of creating the legal relation
2. Offer must be certain, definite and not vague
3. Offer may be express or implied
4. Offer must be distinguished from an invitation to offer
5. Offer may be specific or general
6. Offer must be communicated to the person to whom it is
made
7. Offer must be made with a view to obtaining consent of the
offeree
8. An offer should not contain a term the non compliance of
which amounts to acceptance
9. Communication of Special terms
12
LAPSE (Revocation) OF AN OFFER

• On expiry of stipulated or reasonable time.


• By not accepting in mode prescribed.
• By rejection by the offeree.
• By death or insanity of the offerer or offeree before
acceptance.
• Revocation by the offeror at any time before acceptance.
• Revocation of the standing offer at any time by giving notice
to the offeree.
• Revocation by non-fulfillment of a condition precedent to
acceptance.
• By subsequent illegality or destruction of subject matter.

13
Rules governing acceptance
• Acceptance must be absolute and unqualified
• Acceptance must be communicated
• Mode and time of Acceptance
• Acceptance by conduct
• Conditional acceptance operates as rejection
of offer

14
Consideration Sec 2(d)
“When, at the desire of the promisor, the
promisee or any other person has done or
abstained from doing, or does or abstains from
doing, or promises to do or to abstain from
doing, something, such act or abstinence or
promise is called a consideration for the
promise;”

15
Rules governing consideration
• Consideration must move at the desire of the
promisor
• Consideration may move from the promisee or any
other person
» Chinnayya V. Rammayya (1987)
• Executed, Executory and past consideration
• Consideration need not be adequate(sec25)
• Consideration should be real, Must not be unlawful,
immoral or opposed to the public policy
• There must be mutuality(eg- charity)
• Should be more than promisee is already bound
16
When consideration not necessary

• Out of natural love and affection


» Rajluckhy v. Bhoothnath case (1900)

• Compensating voluntary act


• In case of gift

17
Capacity to contract
• Sec11: Every person is competent to contract who is
of age of majority according to the law to which he is
subject, who is of sound mind and is not disqualified
from contracting by any law to which he is subject.
“An agreement entered into by or with a minor is void ab initio.”
• Sec 12: A person is said to be of sound mind for the
purpose of making a contract if at the time when he
makes it he is capable of understanding it and of
forming a rational judgment so as to its effect upon
his interests.

18
Position of Minor’s Agreement
• An agreement entered into by or with a minor is void
ab initio.
• Minor can be beneficiary
• Minor can always plead minority
• Ratification on attaining majority is not allowed
• Contract by a minor’s guardian
Persons disqualified from entering into a contract
• Alien enemy
• Foreign sovereigns and ambassadors
19
Free consent

• Sec 13 : Two or more persons are said to have


consented when they agree upon something
in the same sense (consensus-ad-idem).
• Sec 14: A consent is said to be free when it is
not caused by coercion, undue influence,
fraud, misrepresentation, or mistake.

20
• Coercion is committing or threatening to commit any act
forbidden by Indian Penal Code, or the unlawful detaining
or threatening to detain any property, to the prejudice of
any person whatever, with the intention of causing any
person to enter into an agreement.
• Undue Influence: When the relations subsisting between
the parties are such that one of the parties is in a position
to dominate the will of the other and uses that position to
obtain an unfair advantage over the other.
• Fraud: Fraud means and includes any of the following acts
committed by a party to a contract or with his connivance
or by his agent with intent to deceive another party thereto
or his agent, or to induce him to enter into the contract
21
Lawful Consideration Or Object

Sec 23: Consideration or object is unlawful if it is


• Forbidden by law
• Defeat the provisions of any law
• Injury to the person or property of another
• Immoral or opposed to the public policy

22
Types of Contract

On the basis of
On the basis of
On the basis of
Enforceability
Creation Execution
• Void
• Expressed • Executed
• Voidable
• Written • Executory
• Illegal
• oral
• Implied
• E-Contract

23
On the Basis of Enforceability
VOID CONTRACT [SEC. 2(j)] A contract which ceases to be enforceable by law becomes void when
it ceases to be enforceable.
VOID AGREEMENT [SEC. An agreement which is not enforceable by law is said to be void. It is
2(g)] an agreement which cannot be enforced from the date when they
were made. It is void ab initio.
VOIDABLE CONTRACT An agreement, which is enforceable by law at the option of one more
[SEC. 2(i)] of the parties, but not at the option of the other (s) is a voidable
contract.
For example: - Mr. A, at knife - point, asks B to sell his scooter for Rs.
50. Mr. B gives consent. The agreement is voidable at the option of B,
whose consent is not free.

UNENFORCEABLE An unenforceable contract is one which is good in substance but


CONTRACT cannot be enforced by law due to some technical defects, such as
under stamping, absence of writing, barred by limitation.

ILLEGAL CONTRACT A contract which is forbidden by law.


For example: - Agreement to commit crime.
24
1. AGREEMENTS EXPRESSLY DECLARED VOID

Agreements by incompetent parties (Sec. 11)

Agreements with unlawful object or consideration (Sec. 23)

Agreement made under mutual mistake of fact (Sec. 20)

Agreements without consideration (Sec. 25)

Agreements in restraint of marriage, trade or legal proceedings etc.

Agreements to do impossible Acts (Sec. 56)


Example:- An agreement to discover treasure by magic is void.

25
Contracts: On the Basis of Creation
EXPRESS A contract which is created either by word spoken or written.
CONTRACT

IMPLIED The contract which is created otherwise by words spoken or written.


CONTRACT
  Implied- A contract that is inferred from the conduct of the parties is
In-Fact said to be an Implied-In-Fact Contract.
Contract

  Quasi These are the contracts, which are created neither by word
Contract spoken, nor written, nor by the conducts of the parties, but
(Sec 68- these are created by the law.
72) For example: - If ‘A’ leaves his goods at ‘B’’s shop by mistake,
then it is ‘B’’s duty to return the goods or to compensate the
price.
In fact, these contracts depend on the principle of the doctrine
of unjust enrichment.

26
On the basis of Execution
Executed An executed contract is a contract in which both the parties have
Contract performed their obligation. This is a contract which has been
completed.
For example:- If ‘A’ agrees to sell his car to ‘B’ for Rs. 100000. The
contract is said to be executed if ‘A’ delivers car to ‘B’ and B pays
the price to ‘A’.

Executory An Executory contract is the contract which is to be performed in


Contract future.

Unilateral Where obligation is pending on the part of one of the parties.


Contract

27
Performance of Contracts: Sec 37
The parties to the contract must either perform or offer to
perform their respective promises unless such performance is
dispensed with or excused under the Indian Contract Act or any
other law.

Who must perform:


i. The promisor himself
ii.If not specified, then agent of promisor can perform
iii.
In case of death of promisor, his legal representatives must perform
iv.In case of contracts involving personal skill, promisor himself should
perform not the third person
v. Joint promisors
Tender of Performance: Sec 38
If the promisor performs his side of the contract and the
performance is rejected, the promisor is discharged from further
liability and may sue for the breach of contract, if he/she wishes
so .

To be valid, a tender of performance must fulfill the following


conditions:
i. It must be unconditional
ii. It must be made at a proper place and time.
iii. If it relates to the delivery of goods, the promisee must have
a reasonable opportunity to check the goods.
Effect of the refusal of the party to perform: Sec 39
When one party to a contract refuses to perform their contractual
obligations, it is considered a breach of contract. A breach of contract
occurs when a party fails to fulfill its duties and responsibilities as outlined
in the contract terms.

Rights to the aggrieved party:


• To terminate the contract
• To indicate by words or conduct that he is not interested in his
continuance
• Rights to claim compensation/damages

30
Discharge of Contracts:
A contract is said to be discharged or terminated when the rights
and obligations arising out of a contract are extinguished.

Modes of discharge of contracts:


• Performance or tender
• Mutual consent or agreement (by novation, rescission,
alteration, waiver)
• Lapse of time
• Operation of law
• Impossibility of performance
• Breach of contract
Mutual consent or agreement
Novation When parties to a contract substitute a new contract for old. On
novation, old contract is discharged and consequently it need
not to be performed. There may be change in parties.

Rescission When parties to a contract agree to rescind it, the contract need
not be performed. In this case, only old contract is cancelled no
new contract is formed.

Alteration Where parties to a contract agrees to alter it, the original


contract is rescinded, with the remit that it need not be
performed.
   No change in parties to the contract.
 Change in terms & conditions of original
agreement.

Waiver Deliberate abandonment or giving up of a right to which a party


is entitled to under a contract,

32
Discharge of Contracts by impossibility:
A contract is deemed to have become impossible of
performance and thus void under the following circumstances:

a. Destruction of the subject matter of the contract.


b. By the death or disablement of the parties.
c. Subsequent illegality.
d. Declaration of war.
Breach of contract

ANTICIPATORY BREACH OF ACTUAL BREACH OF


CONTRACT CONTRACT

• When the promisor • Where the promisor


refuses altogether to refuses to perform
perform his promise and promise on the scheduled
signifies his unwillingness, date. When one of the
even before the time of parties breaks the contract
performance has arrived, by refusing to perform the
it is called Anticipatory promise when it falls due,
Breach. it is Actual Breach.

34
Misrepresentation: Mistake:

35
Remedies for Breach of Contracts:
When a contract is broken, the injured party has several courses
of action open to him. The injured party may :

i. Rescind the contract and refuse further performance of


contract
ii. Sue for damages
iii.Sue for specific performance
iv.Sue for injunction
v. Sue on quantum meruit
Damages
• Ordinary: arises naturally in normal course of
business
• Special: when party to contract receives a
notice of special circumstances
• Vindictive: awarded to punish the defendants
• Nominal: when there is breach of contract but
plaintiff didn’t suffer real damage

37

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